This is my hypothesis on valuation of cryptocurrencies.
Simply, the market cap of a cryptocurrency should be equal to the total value of goods or services it can directly purchase. A currency is representative of the value that can be offered by its network participants.
For example, Tether is backed by the US dollar. The market cap of the cryptocurrency Tether should never exceed or go below the dollar backed value. We see this in every day trading of Tether. The same could be said for any currency that represent a hard asset. 1 Tether theoretically be able to purchase 1 USD.
The same principle could be said for a share of an ETF that could be redeemed for gold, for example GLD or IAU, if these were able to be traded like cryptocurrencies.
By using this principle, we can evaluate market caps of digital protocols by estimating the value that they provide fundamentally, by evaluating their purchasing power.
We can take the most popular cryptocurrency, Bitcoin, as an example.
The value of Bitcoin should be equal to its current direct purchasing power, plus any future purchasing power. The consideration of future purchasing power introduces an element of speculation, just as when evaluating traditional assets for future cash flows.
However, evaluating the current purchasing power is not as speculative. All transaction data lies within the blockchain, and can be evaluated based on value of US Dollars sent through the protocol in the form of tokens. The exchange of tokens on the blockchain is indicative of a real economy, and we see a robust economy in Bitcoin.
We can also evaluate the market to see exactly what it is one Bitcoin can purchase directly. As many companies accept Bitcoin directly, such as Overstock, the possibilities are endless. Generally goods are priced at the Bitcoin / US dollar (or other local currency) exchange rate. The current purchasing power and therefore the current fundamental valuation of Bitcoin represents the market cap (measured in USD at this time for sake of simplicity) of all merchants who directly accept Bitcoin.
As more merchants directly accept Bitcoin, the network value of Bitcoin increases, and therefore the value of one Bitcoin increases.
This evaluation framework can be extended to any cryptocurrency.
Many other cryptocurrencies do not focus on replacing money, but instead focus on delivering value within a specific use case. For example, the Steemit blockchain is focused on user ideas and thoughts.The Steemit blockchain is more complex to evaluate as there are three different cryptocurrencies within this ecosystem, Steem, Steam Power, and Steam Dollars. For the sake of simplicity, I make the general assumption that the value of the most liquid of these tokens, Steem, is equivalent to the market cap of the entire Steem blockchain. The value within the Steem blockchain is not necessarily tangible goods or services, but rather information. As the value of this information increases, the value of Steem should increase as well.
Disclaimer: I am not an investment professional and this is not investment advice. This is strictly my own opinion.
An article just came out on Medium sent to me by the Token Economy newsletter. The article is here: https://medium.com/@cburniske/cryptoasset-valuations-ac83479ffca7. Their methodology is similar, saying that the market cap of the currency is equal to the value of goods/services able to be purchased within the network / VELOCITY. Token velocity is the missing piece to my valuation strategy, and makes sense. It is great to read a discussion on the concept of velocity.
Hmmmm. Makes common sense... Have you read my intro post?? I manufacture goods and want to accept as many types of crypto as possible (without getting screwed) for both retail and wholesale transactions. I'm guessing this is what you meant by "smart assets" and I appreciate you confirming my vision.